Law of Contract I Teaching Material

Developed By:

1) Mesganaw Kifelew

2) Demelash Shiferaw

Sponsored by the Justice and Legal System Research Institute

2009

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Table of Contents

Chapter One: Obligations in General……………………………………………………...….1

1.1. Introduction………………………………………………………………………………....1

1.2. The Concept of Obligation…………………………………………………………………..1

1.3. Definition of Obligations……………………………………………………………………2

1.4.Sources of Obligations……………………………………………………………………….3

1.5. Types of Obligations………………………………………………………………………...4

1.6. The Meaning of Contract/Contract Law…………………………………………………….6

1.7. The Purpose and Scope of Contract Law……………………………………………………8

1.7.1. Purpose of Contract Law…………………………………………………………...8

1.7.2. Scope of Contract Law……………………………………………………………..9

1.8. Historical Development of Contract Law...…………………………………………………10

1.9. The Economic Analysis of Contract Law…………………………………………………...11

Chapter Two: Formation of Contracts……………………………...………………………...14

Introduction……………………………………………………………………………………...14

2.1. Capacity………………………………………………………………………………..........18

2.2. Consent……………………………………………………………………………………...18

2.2.1. Communication of Consent…………………………………………………………18

2.2.2. Acceptance…………………………………………………………………………..28

2.2.3. Defect in Consent……………………………………………………………………37

2.3. Object of Contracts………………………………………………………………………….53

2.3.1. Object Defined………………………………………………………………………53

2.3.2. Freedom of Contract………………………………………………………………...54

2.4. Form of Contract…………………………………………………………………………….62

2.4.1. Definition……………………………………………………………………………62

2.4.2. Freedom of Form……………………………………………………………………62

2.4.3. Contracts made in Written Form……………………………………………………64

2.4.4. Effects of Form……………………………………………………………………..69

2.4.5. Written Form………………………………………………………………………..70

2.4.6. Other Special Forms…………………………………………………………………71

2.5. Effects of Elements of Contracts…………………………………………………………...72

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2.5.1. Difference between Void and Voidable Contracts…………………………………73

2.5.2. Similarities between Void and Voidable Contracts…………………………………76

Chapter Three: Effect of Contracts………………………………………………...…………96

3.1. What does Effect of Contract Mean…………………………………………………………96

3.2. Interpretation of Contract……………………………………………………………………97

3.2.1. Searching Intention of Parties……………………………………………………….98

3.2.2. Interpretation in Favor of Debtor…………………………………………………..100

3.3. Performance of Contracts………………………………………………………………….101

3.3.1. Who Performs Contracts…………………………………………………………..102

3.3.2. Who may Receive Payment………………………………………………………..103

3.3.3. What to Perform……………………………………………………………………106

3.3.4. Appropriation of Payment………………………………………………………….109

3.3.5. Place of Performance………………………………………………………………111

3.3.6. Time of Performance………………………………………………………………114

3.3.7. Transfer of Risk……………………………………………………………………118

3.3.8. Cost of Payment……………………………………………………………………119

3.3.9. Debtors’ Right to Receipt………………………………………………………….119

3.4. Variations of Contracts…………………………………………………………………….120

3.4.1. Introduction………………………………………………………………………120

3.4.2. Judicial Variation of Contract……………………………………………………122

Chapter Four: Non-Performance of Contract and Its Remedies…………………………..125

4.1. Introduction………………………………………………………………………………...125

4.2. Meaning and General Remedies of Non-Performance…………………………………….125

4.3. General Remedies of Non-Performance under Ethiopian Law……………………………128

4.3.1. The Pre-Requisites for Invoking the Remedies of Non-Performance…………...128

4.3.2. Enforcement of Contracts………………………………………………………..132

4.3.3. Cancellation……………………………………………………………………...136

4.3.4. Damages (Compensation)………………………………………………………..140

References………………………………………………………………………………………144

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CHAPTER ONE

OBLIGATIONS IN GENERAL

1.1 Introduction

This chapter is intended to introduce the students to the basic notions of obligations and

contracts that are crucial to understand the chapters that follow. Here, the chapter will

discuss the concept of obligations, the sources of obligations, types of obligations, the

meaning of contracts, the historical development of contracts and contract law, as well as

brief discussion on economic analysis of contract law.

1.2 The concept of obligation

The conceptual foundation of obligation traces as far back to ancient Roman law which

defines obligation as a means of an undertaking or legally binding relationships where

one party promises the other party to perform some acts or to do something. Ancient

well-known Roman lawyers defined obligations based on their personal opinion, which

as a result has develop the concept of obligation.

Year Gay, a Roman jurist, defines obligation as „a means of personal claim brought

against another in order to force him before us to give us so as to we are able to enforce

our rights. Gay also classifies obligation in terms of contract, quasi-contract, delict, and

quasi-delcit

Pavel year also understood obligation as an undertaking not by Roman citizens to

perform some acts or to do or to give or to render rights to non-roman citizens regarding

to give, to do, or to render some rights to roman citizens.

The concept of obligation by both classical legal scholars was unilateral in character and

discriminatory in nature since it imposes obligation to do, to give or to render rights only

on non-roman citizens not the Romans.

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However, the institute of Justinian defines obligation as a legally binding relations when

Roman citizens undertake to perform certain acts or to do something in accordance with

the Roman law.

Obligation defined in the institute of Justinian, differed from the obligations defined in

the classical Roman jurists in that the institute defines obligation in the aspect that Roman

citizens to carry out.

In general the concept of obligation can clearly be expressed as;

a) Obligation to give or not to give

b) Obligation to do or not to do

c) Obligation to render rights to others to do something.

1.3 Definition of Obligations

Black‟s law dictionary defines obligation as „a legal duty or moral duty to do or not to do

something‟. Common-law scholars such as Fredrick Pollock defines obligation in its

popular sense as merely synonym for „duty‟. In its legal sense derived from roman laws

„an obligation is the bond of legal necessity or vinculum juris which binds together two or

more determinate individuals‟.

John Salmond (year) defined obligation in its more general acceptation as „something the

law or morals command a person to do a command that is made effective by the

imposition of sanction if a person failed to comply such a command‟

In the modern legal systems and currently existing legal materials, there is no exact or

single whole definition of obligation. However, some scholars define it based on their

own legal system For instance French judges define the term obligation as a legally

binding relations to another party is obliged to give or to do or not to do something.

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Likewise the Ethiopian civil code, in the book IV of the code uses the term obligations

with out defining what it means. However, like French judges who define obligations

indirectly from article 1101 of the French civil code of the term contract as an agreement

whereby two or more persons as between themselves create, vary or extinguish

obligations of proprietary nature.

1.4 Sources of obligations

According to Gay, Roman jurist, the fundamental source of obligation can be classified

into two:

a) Contract

b) Beyond the contract

Those obligations, which arises beyond the contract, are divided into unjust enrichment

(quasi-contract), unlawful acts (delict) and causing physical injure to the person or

causing damage to property of person (quasi-delict).

In modern time, the laws of different countries clearly express the sources of obligation.

For instance, French civil code classifies the source of obligation as;

i) Obligation that arises from contract

ii) Obligations that arise beyond the contract

iii) Obligation that arises from the unlawful acts

iv) Obligations that arises from the causing of physical injure or causing material

damage

vi) Obligations arising from law

In Ethiopian legal system, there are no clearly stated classifications of sources of

obligations. But Art.1675 of Ethiopian civil code generally expresses obligations as

arising from contractual agreements.

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However, the close readings of the provisions of the civil code show that there are other

sources of obligations-like those arising from non-contractual relationships (from

Art.2027-2178), obligations arising from unlawful acts or obligation that arises from the

causing of physical injure or obligation arising from the causing of material damage

(fromArt.2027-2161) and finally, obligations arising from unjust enrichment (from

Art.2162-2178).

In so far as an obligation arising from the law is concerned, it happens in situations when

law imposes obligations on persons to give or not to give, to do or not to do some acts

recognized in almost all-legal systems.

Obligation arising from the law is a unilateral obligation imposed on citizens or

contracting parties without their consent. It includes among other things

Obligation to pay income taxes

Obligation to render military services

Obligations of creditors

Obligation of debtors

Obligations of families to their children, etc.

1.5 Types of Obligations

Obligations can be classified based on the nature of activities, and the number of parties

legally bound by the obligation. Accordingly, they can be classified into:

1) Divisible obligation

This is one whereby a party undertakes to perform its obligations by dividing into parties.

For instance, if A and B owed C 1,000 BIRR such parties to the obligation perform or

discharge the obligations by paying half (part) of the debt to C, which is 500 each.

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2) Indivisible obligations

In this type of obligation, the performance of the obligation undertaken cannot be divided

into parts. Hence, in this type of obligation partial performance is impossible given the

conditions and circumstances of its formation, which does not allow the performance of

obligation by dividing into parts.

3) Positive obligation

This is a situation where a person‟s obligation is to do or to give some thing to another. It

requires an action from the debtor.

4) Negative obligation.

This is a situation where a person‟s obligation does not to do some thing or it refrains

from doing some thing. Such obligations are also called obligations not to do.

Example, company A may agree with company B in which company A under takes an

bligation not to produce or sell certain goods in the same market.

Based on the number of parties legally bound, obligations can be classified into

unilateral, bilateral, and multilateral obligations.

a) Unilateral obligation arises from contract in which two parties are participate.

However, only one of the parties is legally bound by the contract for the benefit

of the other contracting party. Example, donations

b) Bilateral obligation arises from a contract entered into by two parties in which

these contracting parties are bound legally to each other on equal terms.

Accordingly, there are two promisors and two promises.

c) Multilateral obligation. This is a case where more than two persons undertake to

perform an obligation. Such obligations can be classified into three:

1) Simple joint obligation

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2) Joint obligations

3) Several and joint obligations

1) Simple joint obligation.

In this type‟s obligation, parties who are bound by such obligation are not jointly liable

for the total debts, but each debtor is liable for its own share with the exception of

Art.1917 of the Ethiopian civil code

2) Joint obligations

It arises from the contractual obligation in which more than two parties participate and

debtors are jointly liable for the debt secured as a result of the obligation entered into

with the creditor or creditors.

3) Several and joint obligations.

In this kinds obligations the co-debtors shall be jointly and severally liable unlike joint

obligation where the debtors are jointly obliged to under take a given obligation, in the

several and joint obligation, the creditor may require all the debtors or one of them to

discharge the obligation in whole or in part.

1.6 The meaning of contract/contract law

Though the questions „what is contract?‟ and “what is contract law?” are of paramount

importance, it is difficult to give a definitive answer to either. But one may say contract

law is most obviously the law relating to agreements or promises. It is primarily

concerned with agreements in which one party, or each party, gives an undertaking or

promise to the other. It governs such questions as which agreements the law will enforce,

what obligations are imposed by the agreement in question and what remedies are

available if the obligations are not performed. Thus contract law is the law based on

liability for breach of promises. However, „Contract law‟ is also used to mean the whole

collections of rules, which apply to contracts, and these includes many rules, which are

not contractual in the sense of being based on a promise to do something. For example, if

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one party induces the other to enter a contract by fraud or misrepresentation, the innocent

party may avail himself of certain remedies based on the rules of misrepresentation

(fraud). There are certain conceptual differences on whether such rules are part of

contract law or tort.

Contract law is primarily concerned with supporting the social institution of exchange.

However, it is not as broad as the institution itself. An enormous proportion of our life is

carried on the basis of exchanges that are in some sense agreements, but many of them

are not governed by what is usually thought as contract law. Some agreements, such as

domestic arrangements, are not governed by law at all.

What is a contract? In Anglo-American legal systems defines contract as a promises or

set of promises for the breach of which the law gives a remedy or the performance of

which the law recognizes in some way as a duty. However, not all promises give rise to

contracts. For instance, if you agreed to keep the house tidy while your parents are away

on holiday you would not expect to find yourself in the court of law being sued for the

breach of contract if you failed to do so. So, what kind of agreements does the law

recognize as creating enforceable rights and duties? To answer this, we need to look in

the rules of each legal system, which provide their own specific definitions of the term

contract and its elements. For instance, the French civil code defines contract in article

1101 as an agreement to establish, vary, and extinguish rights and obligations of the

parties. When we come to the Ethiopian legal system, we find the definition of contracts

(enforceable agreements) under Article 1675 of the Ethiopian Civil Code. As such

contract is defined as;

„‟An agreement whereby two or more persons as between themselves create, vary

or extinguish obligation of proprietary nature‟‟.

This definitional article plus Article 1678 on elements of contract tell as in general the

type of agreements enforceable by the law of contract in Ethiopian legal system. In the

next chapters, you will study the details.

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1.7 The purpose and scope of contract law

1.7.1 Purpose of the contract law

Contract law is primarily concerned with supporting institutions of exchange, which is an

enormous part of our life carried on the basis of that are in some sense termed as

agreement. Contract law has many purposes but the central one is to support and control

the millions of agreements that collectively make up the market economy, and hence

operates in the context of dispute resolution mechanism. Besides it empowers the parties

to make agreements that the law will enforce. It also enables parties to the contract to

make exchanges that might otherwise carry too great risk whether of disruption by some

contingencies or default by the other party. Accordingly, contract law in this respect is

the most important which creates smooth functioning of business transaction by creating

certainty, predictability, and enforceability.

In this context, it is also important to note the different approaches to contract law

determine its role. In the nineteenth century, at least in common law legal systems, the

courts seemed to place great emphasis on freedom of contract. During this period the

courts tended to reduce the numbers of rules controlling contract power. They see the role

of contract law as enforcing the agreement of the parties. There are still writers who

suggest that the law should enforce any agreement which was „freely made‟ between the

parties provided it has no adverse effect on others. These “libertarians” see the individual

as the best judge of his or her own interest and consider that what was freely agreed is by

definition, fair. Any attempt to use contract law to influence substantive outcomes (e.g. to

try to produce a fairer distribution of wealth in society, or even to maintain the previous

distribution) is both illegitimate and misguided.

Others take a less extreme position. They agree that individuals should be free to pursue

their own self-interest but they recognize that in some cases „the market‟ may not operate

efficiently. For example, in cases where there is some kind of monopoly or where one

party does not fully understand the contract, the law may need to intervene. Many such

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writers would say the contract law, whether we like it or not, does affect the distribution

of wealth in society and that this should be recognized. A few writers go further and

argue that it is no longer adequate to describe the law of contract as primarily concerned

with supporting voluntary exchange in the market and correcting occasional abuses or

market failures. In their view another transformation has taken place and the modern

law‟s prime concern is with controlling domination and promoting fair exchange and co-

operation. When you deal Ethiopian law of contract, you need to assess which approach

is adopted in the Ethiopian legal system.

1.7.2 Scope of Contract Law

The scope of contract law varies from country to country and from legal system to legal

systems depending on the types of obligations they govern. Unlike non- contractual

obligations in which a person undertakes an obligation not to wrong another by conduct

that the law of tort establishes as wrongful, contract law governs contractual obligations

which arises from agreements made between two or more persons which puts the

promisor under the obligation to perform his or her promises under the sanction of an

action against him for breach of the contract.

A contractual obligation implies the existence of an „obligor‟-the person who is legally

under the obligation and the „obligee‟for whose benefit the obligation exists. This feature

of contract distinguishes contract law from criminal law obligations.

Moreover, contract law may have a general or special application depending on the

nature and origin of contractual undertakings at a given time. Therefore, based on the

scope of application of contract law contract laws may be dissected in to two areas of

applicability complementing each other. For instance, article 1676(1) of the Ethiopian

civil code stipulated the application or scope of general contract to apply to contracts

regardless of the nature thereof and the parties thereto. Thus, the general rules of contract

law apply to all contracts. However, the provision also recognizes that special provisions,

as laid down in Book V of the Civil Code and the Commercial Code, may be applicable

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to certain contracts. The law also stipulate that the relevant provision of the Civil Code,

Book IV title XII, shall apply to obligations notwithstanding that they do not arise out of

contract. Accordingly, contract law may be applicable to extra-contractual obligations,

unlawful enrichment obligation and so on. However, the scope of application of this law

does not affect the special provisions applicable to certain obligations by reason of their

origin or nature (Art. 1677(2)).

1.8 Historical development of contract law

This section provides a very brief account of the historical development of contract law.

The historical development of contract law can be under stood in terms of the conceptual

foundations of obligations, which was traced back to ancient and classical Roman law.

However the foundation of the present day law of contract were laid in the 19th

century.

This period in history saw the rapid expansion of trade and industry inevitable resulting

in the increments in the volume of commercial disputes as a result people turned to the

court of law for solutions. Gradually, there developed a body of settled rules which

reflected and of the disputes from which they arose and the prevailing belief of the time.

However, this rules and belief are affected by the dominant economic philosophy, the so

called the laissez-faire individualism-the view that the state should not meddle in the

affairs of business and that individuals should be free to determine their own destines.

This philosophy was mirrored in the law of contract by two assumptions-freedom of

contract and equality of bargaining power. According to freedom of contract theory it is

assumed that every one is free to choose which contracts they entered into and the terms

on which they wish to do so. According to equality of bargaining power theory, the

parties were deemed to have equal power to bargain on their business and deemed to be

of equal bargaining strength.

These theoretical foundations of contract law produced an acceptable legal framework for

the regulation of business transaction that resulted in the crystallization or codifications

of contract laws across the world. The two theories did also define the role of the courts.

Courts were required to enforce the agreement of the parties, as it was with out questions

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its fairness etc. Over years the freedom of contract theory though maintained at present is

subjected to different limitations. The theory of equality of bargaining power had brought

certain unnecessary results because parties to a contract do not necessarily have equality.

For example, employers and employees, producers and consumers, lenders and borrowers

do not have equal power in the negotiations. Employees, for example, did not have equal

bargaining power with employers, and as a result entered in to contracts the terms of

which were more favorable to the employers (employees were supposed to work for as

long as 16 hours per day & more, less wages etc). Courts were simply required to enforce

such terms. This led to dissatisfaction, riots, unrest etc calling for government

intervention. Thus, governments do lay down the minimum conditions for enforceable

employment contracts. To day, we find the law of contract providing the conditions for

the making and enforcement of contract. However, we should note that the theory of

freedom of contract and equality of bargaining power are still the foundations of contract

law in many legal systems.

1.9 The Economic Analysis of Contract Law

This section is intended to introduce students to an emerging discipline of law and

economics as applied in contracts. The economic analysis of contract law provides a new

paradigm into contract law in terms of both defining the concept and the economic

function of contract & contract law. As the subject is vast to cover in this material, we

have opted to consider some of the concepts and assumptions suggested by leading

scholars (Look „Economics of Contract Law‟ by Kronman and Posner (1979) for further

understanding).

One fundamental economic principle is that if voluntary exchanges are permitted-if, in

other words, a market is allowed to operate-resources will gravitate towards their most

valuable uses. The exchange will make not only the parties better off but will also

increases the wealth of the society, assuming that the exchange does not reduce the

welfare of nonparties more than it increases the welfare of the parties. The existence of

the market-locus of opportunities for mutually advantageous exchanges-facilitates the

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allocation of the good or service in question to the use in which it is most valuable,

thereby maximizing the wealth of society.

It is assumed that individuals are rational maximizers of their own self-interests. That is,

they will respond to other people and to events in a way that increases their own utility. It

is this, which lies behind the notion that individuals will trade resources until the

resources reach the people who value them most highly. Economists express the idea that

something may be worth more to one person than to another by saying the first will be

prepared to pay more for it than the second. However, they use the word “utility‟ rather

than „wealth‟ because the theory does not assume that every one is selfishly pursuing

greater personal wealth. Individuals may well like to see other individuals made better off

and be prepared to give some of their own wealth to achieve that. An economist fits this

into his general theory by saying the donor‟s „utility‟ is increased by seeing the donee

made better off.

The basic economic function of contract law is to provide sanction for reneging, which, is

in the absence of sanctions, sometimes tempting where the parties‟ performance is not

simultaneous. During the process of an extended exchange, a point may be reached where

it is in the interest (though perhaps short-run interest) of one of the parties to terminate

performance. If A agrees to build a house for B and B pays him in advance, A can make

himself better off, at least if loss of reputation (which, depending on A‟s particular

situation, may be unimportant to him) is ignored, by pocketing B‟s money and not

building the house. The problem arises because the non-simultaneous character of the

exchange offers one of the parties a strategic advantage, which he can use to obtain a

transfer payment that utterly vitiates the advantages of the contract to the other party.

Clearly, if such conduct were permitted, people would be reluctant to enter into contracts

and the process of economic exchange would be retarded. Hence, the basic function of

contract law to provide a sanction for breach of promises.

A non instantaneous or extended exchange creates not only strategic opportunities that

parties might try to exploit in the absence of legal sanction, but also uncertainty with

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regard to the conditions under which performance will occur. This uncertainty exposes

the parties to the risk that the costs and benefits of their exchange will turn out to be

different from what they expected. An important function of contract law in this regard is

to enforce the parties‟ agreed upon allocation of risk.

A related function is to reduce the costs of the exchange process by supplying a standard

set of risk allocation terms for use by contracting parties. Many substantive rules of

contract law are simply specifications of the consequences of some contingency for

which the contract makes an express provision. If the parties are satisfied with the way in

which the rules allocate the risk of that contingency, they have no need to incur the

expense of writing their own risk allocation rule in to the contract.

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CHAPTER TWO

FORMATION OF CONTRACTS

Introduction

Consent is a declaration of intention to be bound by an obligation. A person has to

express his willingness to create an obligation on himself, or give up some or all of his

proprietary rights. In modern times individuals have relative freedom to decide on their

own rights especially property rights with out the interference of a state or another

person. So individual can not lose his property right unless he himself wants to loss it

except by expropriation. Contract is one of the major areas of law that recognizes

autonomy of individuals. The 17th Century John Locke‟s theory of social contract and

Adam Smith‟s laissez-faire gave political and economic justification for individual

autonomy. Such individual autonomy is expressed through consent i.e. an individual can

determine his own fate (freedom of contract).

So in a contract, a person should know the obligation he is going to carryout and the

benefit he is going to get / or lose. Knowledge is not enough, he should also agree to such

obligation/ benefit. Agreement is not still enough. The person should also agree that if he

fails to meet his obligation as agreed the state machinery may be used to force him to

carry out his obligation.

Unless a person clearly knows what rights and obligation are to be created, varied, or

extinguish it is impossible to claim that he has agreed.

That is what is provided under art 1679. The parties have to know means they have to

define their obligations (undertakings). Moreover they have to agree to be bound.

Therefore; contract can not be imagined without consent of the parties i.e. contract is

dependent on the consent of the parties.

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Non-Binding Agreements

Mere domestic or social agreements are not usually intended to be binding and, therefore,

are not contracts. E.g. A father told his son that he (father) will reward 10,000 Birr if the

son scores 4.00 points in his first semester exam.

A binding contract is usually in the nature of a commercial bargain, involving some

exchange of goods or service for a price. In considering whether sufficient intention to

create a binding contract is present; two situations are possible:

a. Where the parties expressed by denying the intention (for commercial agreement).

e.g. A written commercial agreements described itself merely as an “honorable

pledge and stated expressly that it was not “to be subject to the jurisdiction of any

court.

b. Where the parties do not expressly deny intention to create legal relation. It is in each

case a question of construction for court to decide as to whether a contract is

intended.

Thus, in commercial agreements, there is a refutable presumption that a contract is

intended but in social or domestic or family agreements there is a refutable presumption

that no contract is intended. (But note that in each case the presumption is refutable by

evidence to the contrary.)

Eg1. C. Persuaded her sister, p to sell her own house and come and live in C‟s on

condition that C would give her house to P by donation. After sometime C injected

P from the house and refused to honor the donation. P claimed damage for breach

of donation contract. Is P correct?

Eg2 B and O habitually ride in each others cars. While in O‟s car, B was injured due to

O‟s negligence and sued for damage under Ethiopian law of carriage. B claims that

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there was contract of carriage between him and O since he (B) contributed to the

petroleum cost. Is “B” Correct?

Eg3. Hawassa University and SNNPR Supreme Court entered into the following

agreement.

Memorandum of Understanding

This memorandum of understanding is signed on this day of 25th

February between

Hawassa University & SNNPR Supreme Court. By this agreement;

1. The Court agrees to make internet service available for the Law Faculty students

of the university.

2. The University agrees to make conference rooms available to any need of the

court.

3. The university agrees to give free library and internet service to any judge of the

court.

So, what is the student asker?

Generally, the mere existence of agreement to be bound by defined obligation does not

necessary make Contract. It is necessary to identify whether the parties intended only

moral obligation or legal obligation, if parties agree to be bound morally only, the

agreement is not a contract since it cannot be enforced by state backing. For a contract to

exist parties must agree that any violation of the obligation would be punished by using

state machinery. Therefore; the phrase “…agrees to be bound thereby…” in Art. 1679

implies the parties‟ intention to take any controversies in relation to obligation to court

thereby allowing the court to interfere in their relation.

Meeting of Mind (Art.1680)

Contract occurs when the minds of the offeror and offeree meet upon common object of

the contract. This meeting of mind is called consensus ad idem i.e. consent to the matter.

The declaration of both parties must relate to the same matter. This is what Art 1680(1)

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provides. However, since meeting of mind is inferred from offer and acceptance made by

the parties, the law is often concerned with the objective appearance of the offer and

acceptance than the actual fact of the intention of offeree or offeror. The person is bound

whatever his real intention may be if a reasonable man would believe that he was

assenting to the terms proposed by other party and upon such belief he enters into a

contract with him. Parties are to be judged not by what is in their mind but by what they

have said, written or done. So no body could be bound by an intention (estate of mind)

which is not included in the offer or acceptance i.e. a person cannot claim to avoid a

contract by citing reservations or restrictions that has not been made clear to the other

party through offer or acceptance (Art 1680(2). When the law in forces the intention

(consent) of the parties it does so, so that the parties‟ reasonable expectation is protected.

Any intention of a party not included in the offer or acceptance never forms part of the

contract. Therefore, obligation that one of the parties wants to be included in the contract

never binds the other party unless such party knew and agreed to be bound by it. In short

Art 1680 is a repetition of Art 1679 and hence may even be deleted from the code.

Formation of contact involves the criteria that the state uses in order to determine whether

or not it has to execute agreements of persons between themselves. In other words, the

state uses the following yardsticks to check whether or not persons have made a law that

binds them.

A) Capacity

B) Consent

C) Object,

D) Form, if any

All contract involve the element of capacity, consent and object i.e. contract can not be

imagined without capacity, consent, and object. However form is required for few

contracts only.

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2.1 Capacity

Although human beings are subject to rights and duties from the moment of birth, to

death some may not be entitled to exercise such rights and duties. Still others may

exercise only some of their rights. Minors and judicially interdicted persons cannot enter

into a contract. However; when a legally interdicted person enters into a contract which

he was prohibited from such is not limited to incapacity but also extends to illegality as

per Art 1716. The same holds true for special incapacities indicated under Art. 194. The

detail of incapacity has already been discussed under law of person.

2.2 Consent (Art.1679-1710)

2.2.1 Communication of Consent (Art. 1681)

Consent is expressed either in the form of offer or acceptance Offer and acceptance are

ways of communicating one‟s own intention to be bound by an obligation. Therefore;

offer or acceptance is declared to another person by ordinary ways of communication

.These ways of communication are oral, written, signal and conduct.

2.2.1.1. Offer

Offer is laying down contents of would be contract i.e. indicating the respective

obligation of each would be parties to the contract and informing the same to them with

the expectation of response from them. Moreover, offer contains the intention of the

person making it to be bound by the content of the offer. In short offer contains three

important elements, the content of the contract, the agreement of an offeror to be bound

and request of the offeror to the offeree to be bound by the offer. The person making the

offer is called offeror. The offeror has autonomy to choose any of the four ways of

communication (Oral, written, signal and conduct). He /she may even choose the ways

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that the offeree shall use to give a response (Art. 16811(2). So Offer may be made in

writing, orally, or by signs or conduct (Art.1681 (1).

Written declaration of offer is when all the elements of offer are reduced in writing on a

paper or electronics and delivered to the offeree. Then the offeree understands the

intention of the offeror by reading the paper or the electronics containing the offer. So, if

the offeree cannot read for whatever reason there must be some one who reads it to him.

For example, if the offeror sends his offer through email or fax such is written

communication of an offer.

Oral commutation of an offer is when the offeror uses voice to tell to the offeree the

contents of the offer and the offeree uses hearing (ears) to know what the offeror is

communicating to him. So using telephone, telegram e.t.c to communicate an offer is oral

communication of offer. In short the offeror uses his mouth and the offeree uses his ear

for communication.

Signal communication is of two types: gesture and object placed to give information.

Gesture is one of the four ways of communication. Mute or/and deaf people use such way

of communication. Such person makes an offer by using signal communication. Nodding

head, shaking hands and hammering down in an auction sale are also communication by

gesture. Objects may also be used to express an intention. For example in a commodity

exchange market, objects are utilized to indicate intention to be bound.

Communication of offer by conduct is when the offeror performs partly or wholly the

obligation that he will perform if the contract is entered into. Earnest is the best example

of offer by conduct (Art.1883). In this case the offeree uses the combination of his sight

or/and ear and mental intellect to know and understand intention of the offeror. Offer by

conduct is an implied offer because the offeree is forced to infer the offer from the

conduct of the offeree. Offeree may infer different obligation from what is intended by

the offeror. So care must be made by the offeror that his conduct is clearly

understandable to the offeree.

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In principle, an offer is binding on the offeror only if it is addressed to a specified person

(Art 1687- 1688). The reason why the offeror is expected to know the offeree and address

his offer to him may be to make sure that the offeror has intended to be bound by his

offer and to avoid the possibility of multiple acceptances for a single contract.

The person may want to advertise his product or service without any intention to be

bound by the content of the advertisement. The person advertising a product or service

may not have the product or service at his disposal and he may be making a market study

i.e. he may want to know the demand for his product. This means although he states the

type of product or service he wants to supply and the price he expects he might not intend

to be bound.

E.g. A certain college releases the following information on Addis Zemene Newspaper.

“our college is going to open Degree Program in Business Management. Tuition free is

birr 500 per month. It takes only 30 months to complete B.A. the program any person

who has completed preparatory or has Degree in any other field is invited to apply soon.”

A person may also release the idea moving in his mind to a friend or even to the public

either to ask advice or to know public opinion so that he can decide whether or not he has

to make an offer. Therefore, if a person “does not make his intention known to the

beneficiary of the declaration” such declaration shall not be taken as an offer (Art 1687

(a).

E.g. Abebe told his mother, Alemitu, that he is happy if his father, Belachew accepts his

Mercedes Benzes, 2007 model as donation. Alemitu told the same fact to Belachew.

Moreover, if offer is communicated to the public, many may come to accept the contract.

This creates inconvenience of choosing a person whose acceptance should be binding on

the offeror. So the easiest way out of such inconvenience is to consider the declaration

that become the source of such controversy as non- binding. In such case ultimate goal of

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the declaration of intention shall be advertisement of the product or service. Therefore;

the following declaration of intention are not offer but advertisement.

Sending price lists or tariffs (Art 1687 (b)

Here, the price list or tariff may be sent to specified address or a specified person but still

such act should not be taken as an offer because of the following reasons.

Dedication to be bound is missing. Such price list/ tariff alone never indicates the

intention to be bound. The document sent contains the price list/tariff which may be taken

as content of the contract but the declaration of intention to be bound is missing. Such is,

therefore; neither a written nor oral offer. Signal communication is using body gesture or

identified object as an expression of one‟s intention but sending of price list /tariff does

not fulfill such requirement. Offer by conduct is beginning to perform would be

obligation but not sending price list.

Price list/ tariff never indicate all terms of the contract such as due date, place of

performance, quantity , etc. So it is not complete even if the person to whom it is

addressed responds positively (Art. 1695(1).

Customarily sending of price list/ tariff is taken as an advertisement

The price list/tariff might have sent to many creating the problem of multiple acceptance.

E.g.1 Moha Bottling PLC has recently started producing beverage in the Hawassa and it

prepared the following and sent it to Taddesse Hotel “Moha is ready to supply the

following Pepsi products” with the corresponding price

Product Unit price

Pepsi cola 0.8birr

Mirinda 0.75birr

Sprit 0.6 birr

Mirinda tonic 0.9 birr

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E.g.2 General Garment PLC distributed the catalogue of its services to Graduating

students of Addis Ababa University.

Posting up price list/tariff and catalogue in a public place

This declaration of intention is not an offer mainly because there would be multiple

acceptances if the declaration of intention is to be considered an offer. Everybody may

have an access to the declaration. Posting is announcing to a public by using – all

possible means such as press, radio and television. It also includes affixing a notice on

board, wall, poles, and car or on any other object.

Eg1 commercial Bank of Ethiopia published the following information in Ethiopian

Herald “Commercial Bank of Ethiopia is intending to employ any person having LL.B

degree. Work place is Hawassa, salary is birr 3500 per month .Employment is permanent.

Interested applicant should submit his CV until 20 Jan 2008 ”

Display of goods for sale to the public

Almost all sales are sale at open market. Every person passing by can have a look at the

goods and can easily infer that the goods are ready for sale .But there may be multiple

acceptance and the content of the contract is also incomplete .Display of goods does not

include some of the contents of the contract such as performance date and place and

quantity. Display of goods could utmost contain the type of goods and their prices (see

example given by G. Krzeczunoviwicz).

Sale by Auction (Art.1688)

It is inviting possible offeror to come and make an offer. Many may come and make an

offer and the person who invited such offer may freely determine which to accept there

by rejecting others. The invitation may either be to buy or to sale. (See auction sales from

news paper and report to your Instructor in a class, Read also Art 2403-2407.)

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Public Promise of Reward (Art 1689)

As stated above, a declaration of intention to be bound by specified obligation becomes

an offer only if it is addressed to an identified person. An exception to this principle is

public promise of reward. Public promise of reward is notifying the public that

whosoever performs a certain act indicated in the notice will be given benefit of

proprietary nature by the promisor. It is a reward that is promised to be given for an extra

ordinary performance or coming across an object lost or person hidden .The promise is

public because it addresses to all which performs the required act. No discrimination is

made on those who may benefit from the promise.

If a promise of reward is to a specified person or group of persons it becomes an

ordinary offer if it is made to be known to such a specified person or group of persons.

In such case, the promisor can use any means to communicate his intention to the

specified person or group of person. It is enough to prove that the promisor has really

intended his declaration of promise to reach the specified persons or group of person.

Such intention can be ascertained from the circumstances and especially from the means

that the promisor uses .For example, if the promisor uses public media such as press,

radio, Television, electronics and etc to which the specified person or group may have

access, the declaration of intention may be taken as an offer if the specified person/group

of person has come to know such declaration.

In case of public promise of reward the media of declaration never matter and the person

who performs a specific act in the promise need not know the promise (Art 1689). In

short, a public promise of reward is special offer.

Exercises

Identify public promise of reward and ordinary offer.

1. Sir Alex Ferguson gave the following press release in 2007 “If Christiano

Ronaldo scores 30 goals in English premier league 2007/2008 , I will give him

a large amount of money ”

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2. The Government of USA publicized the following information in internet

“Whosoever reports the whereabouts of Bin Laden shall be rewarded one

million Dollar ”

3. The following declaration of intention was broadcasted in Ethiopian

Television.

“Our Father, Ato Ekubaye Berhe left home on Dec 12, 2007 and has not yet returned. Ato

Ekubaye is 49, , tall very handsome, bold and dressed white gabardine suit on the day he

left home Whosoever, reports to us the whereabouts of our father , will be rewarded . His

sons, Bekele and Zelalem”

Please give at least four other similar examples.

Effects of Offer (Art.1690, 1691, 1693(1), 2055)

This is the effect the offer is to bind the offeror. Once the offer is made, it means one side

of the parties to the contract (the offeror) has agreed to be bound. Offer contains would

be obligation i.e. the content of would be contract is defined by offer. This indicates that

the conclusion of a contract is partly completed. The party making an offer cannot change

his opinion. That is why it is necessary to distinguish an offer from mere declaration. A

person making mere declaration of intention can change its declaration at any time it

wants for whatsoever reason without any legal liability for unreasonable and arbitrary

change of its intention. It is obvious that if declaration of intention is not an offer, it is full

autonomy of the person who declared such intention to live up to his declaration or

change his intention for whatsoever reason. However, an offer cannot be changed by the

offeror for unjustified reason. An offeror who changes his offer partially (make some

modification to the content of his offer) or totally (refusing to be bound by his offer) is

liable for any material damage on the offeree.

If offer is binding, where does it begin to be binding? There might be time gap between

the offeror‟s release of the offer and the offeree‟s reception of the same. This is true

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especially when written form or conduct is used to communicate an offer. For example,

an offeror may use letter or fax to reach the offeree. So the offer begins to be binding at

earliest from the moment the offeree knew its content. Any declaration of intention to be

bound by a contract may not even be considered as an offer for the sole fact that it has not

yet reached the offeree (Art 1687). So the offeror can freely change the content of his

offer or totally withdraw it before it reaches the offeree (Art 1693(1). The offeror can

make his offer not to reach the offeree by informing the offeree that change has been

made to the content of the offer or that it has been withdrawn. This has to reach the

offeree before he receives the offer or at latest before the offeree takes decision that

affects his material interest on the assumption of the offer (Art 1693). This means an

offer may be withdrawn or modified as far as the offeree has not incurred expenses with a

view to concluding a contract with the offeror. So what is crucial is not the time when the

offeree received the offer but the decision he has taken due to his knowledge of the offer.

The offeror can change or withdraw his offer at any time before the other takes decision

that affects his interest. So the burden of proving that the offer is changed or withdrawn

after he takes decision that affects his material interest is on the offeree. Changing or

withdrawing an offer is a fault (Art.2055).

Change or withdrawal of an offer is not a fault when it is withdrawn or changed.

a. before the offeree knows the offer or

b. at the time the offeree know the offer or

c. at any time before acceptance for justified reason

Even if modification or withdrawal is made contrary to the above precondition, the

offeror may be liable only if the offeree proves that the offer is the cause for his loss.

How Long does the Offer Bind? As we see above offer is binding from the moment the

offeree knows its existence. Such tells us the time than the offerbegin to produce effect. If

it begins it must also end somewhere. Everything that has beginning must also have end.

The offeror should be given an opportunity to be released from his offer or else how long

will he wait for acceptance. The offeror may himself determine how long the offer

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remains binding. For example an offeror may indicate in his offer that acceptance be

made with in ten days from the moment the offeree knows the offer. After expiry of such

ten days the offeror can change, modify or withdraw his offer for whatsoever reason and

without any liability to the offeree (Art 1690).

In case the offeror fails to fix time limit for acceptance, the offer remains binding for

reasonable period only (Art 1691). Reasonable period indicates the time that the offeree

needs to understand the offer and decide to accept or reject it. So if the offeree remains or

unable to decide within such reasonable time the offeree will no longer be bound by his

offer. But the crucial issue is “how long is a reasonable period” The length of reasonable

period should be the average time that the average person may need to determine on the

offer. The circumstance of the offeree should not be taken in to account to determine the

length since contract is not a charity and the offeror is running for gain and has no legal

or moral obligation to sacrify for subjective weaknesses of the offeree. However,

objective criteria such as the existence of current price for the subject of contract, market

stability, and complication of content of the contract should be taken into account. For

example if offer is made for sale of coffee in Ethiopia, the offeree may be expected to

respond in hours and a response coming after days may be taken as not coming within a

reasonable period. On the contrary an offer for a construction may be reasonably binding

for weeks. Market stability is also very important to determine the reasonableness of the

period since in case of market instability price changes now and then thereby affecting

the decision of both the offeror & offeree. So when there is market instability reasonable

period should depend on the frequency of price change. For example in Ethiopia price of

fuel is revised every three months and such revision probably affects the advantage of

either parties. So court should consider such other similar facts affecting market price.

Whenever the court is not convinced that the period is reasonable, it should conclude that

the period is unreasonable since any doubt should benefit the defendant (Art. 1738,);

whosoever, claims the right has a burden to prove the existence of such right.

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We have to bear in mind that if the acceptance reaches the offeror after expiry of

reasonable period the offeror has a duty to inform the offeree the lateness of the

acceptance by using the speediest medium of communication available. Such medium

should at least be as speedy as the medium used by offeree to send his acceptance. Using

the speediest medium is not enough, the response should be made at the moment the

offeror receives the acceptance. So if the offeror fails to reject the acceptance

immediately the offeree has the right to claim that the acceptance was given within

reasonable period and hence contract was concluded (Art 1691(2).

The third ground that terminates the effect of an offer is the offeree‟s rejection of the

offer (Art 1690(2). Rejection of an offer is, either making modification to the content of

the offer or sending a “no” answer to the offeror. Offer is deemed to be rejected “where

acceptance is made with reservation or does not exactly conform to the term of

acceptance” (Art 1694). Art.1690 (2) expressly provides rejection of offer as a cause of

termination of offer where the offer contains fixed period of time for acceptance. The

same should apply to cases under Art.1691. There is no logic for offeror to wait for an

expiry of reasonable period once the offeree rejects the offer. Even one can argue that

once the offeree rejects the offer, it shows that the reasonable period has already expired

since reasonable time is the time that is sufficient for the offeree to respond. But since

reasonableness should not depend on the subjective situation of the offeree we may still

say that rejection of offer may be made before expiry of reasonable period. But still the

rejection releases the offeror because there is no justification for the offeree to get time to

revoke his rejection and claim to accept the offer simply because the objective reasonable

time has not yet expired. There is a less possibility that an offeree who once rejected an

offer could come to accept the same and forcing the offeror to wait such change of mind

is fooling him and inequitable..

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2.2.2. Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)

Acceptance is a positive response to an offer i.e. it is a declaration of intention to be

bound by each and every contents of an offer. In short acceptance is a “Yes” answer to all

the contents of the offer. Any slightest modification made to the content of the offer is

considered as rejecting the offer and making, an alternative offer (Art.1694). So the

offeree must take care in giving response to an offer. He has three alternative answers to

an offer, the “yes” answer which means accepting the offer as it was made; the “No”

answer which means totally rejecting the offer or “acceptance with reservation” which

means having reservation or alternative proposals for some of the contents of the offer.

So “where acceptance is made with reservation or does not exactly conform to the terms

of the offer” the offeree must remind himself that he is taking the position of the offeror

and the offeror then becomes an offeree (Art. 1694). That means the offeree (the current

offeror) is bound by the new offer he makes until the time limit he fixes for acceptance

expires (Art. 1690(1) or until he reasonably expects the other party to decide on the new

offer (Art.1691(1).

Eg.1 Abebe wrote the following e-mail message to Tuffa”

“Dear Tuffa, how are you doing? I am very fine, I am going to sale my Toyota Land

cruiser, 99 model automobile to you to birr 30,000. Delivery and payment date is on

January 20, 2008 In Addis Ababa”

Tuffa may respond in any of the three ways.

“Thank you, I am lucky to buy your car.”

“Thank you for your concern, but I do not need any automobile now!”

“Thank you. I am very much happy to buy your car but the delivery place should

be in Awassa”

Acceptance How acceptance is Made

Since acceptance is communication of intention, like an offer, it can be made in all

possible ways of communication. So, the offeree can use writing, oral, sign or conduct as

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a means of communication. The medium of communication never matters. The offeree

may use letter, press, telex, email, etc to communicate his acceptance in writing. He may

also use telephone, telegram, video, radio, television etc as a medium of oral

communication. Signal communication is showing certain publicly known physical

gesture such as shaking the hand of the offeror, nodding head or using certain objects

publicly used to indicate intention(Art.1688(2). Signal communication usually requires

the physical presence of both the offeror and the offeree at the same time and at the same

place.

Communication of acceptance by conduct means performing partly or fully the obligation

proposed by the offer or benefiting from the rights proposed by the offeror.

E.g1 If a person who is offered to buy a certain goods comes and takes some or all of the

goods or if he pays part or all of the price of goods, such act may be interpreted as an

acceptance by conduct.

Generally, an acceptance can be given provided the offeree knows the existence of the

offer. Acceptance is declaring agreement which presupposes knowledge of the obligation

for which the agreement is given. However; if the offer is public promise of reward the

offeree is not known to the offeror; hence whosever performs the promise is considered

as if he accept by conduct regardless of his knowledge of the existence of the offer (Art.

1689(1).

Incidentally Art.1689 lacks clarity and may be rewritten as follows:

Art. 1689 Public Premise of reward

1) A Promise published in any manner to reward a person who will find an object

which has been lost or who will perform certain act shall be an offer.

2) Such offer shall be accepted where a person brings the object back or performs

the act, notwithstanding that he did not know the offer.

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Duty to Respond (Art. 1682 -1685)

The offeree does not have a duty to give response to the proposal of the offeror. He can

respond negatively or positively only if he wants to respond otherwise he may for

example read an offer and simply throw it in a dust basket or tear it off by reading only

the address of the letter. That means the offeree has the right to remain silent; no one is

allowed to disturb his peace. Moreover; if the offeree remains silent there is no assurance

that the offer was brought to his attention; he might have not known the existence of

offer. Therefore silence shall not amount to acceptance (Art. 1682). It should not be taken

as a signal indication of acceptance.

However, in the following cases the offeree has a duty to respond a “no” answer if he

does not want to be bound by an offer, otherwise his silence may be taken as a sign of

acceptance by the offeror.

a. Duty to accept: - sometimes a law or contract may impose on the offeree the

obligation to accept offers made to it. This is mainly when the offeree is a monopoly

supplier of goods or provider of services. Some public enterprises are established by law

to provide goods and services to the public, hence they are duty bound to accept an offer

from the public. For example, Ethiopian Electric Power Corporation, Ethiopian

Telecommunication, Water & Sewerage Authorities are expected to accept offer for

electric use, telephone line and pipe line. If they do not want to be bound by the offer

they have to notify with in time specified in the offer, if any (Art. 1690(1) or within a

reasonable time (Art 1691(1). Otherwise their silence is considered as an acceptance

(Art.1683).

Private Business Enterprises may also have a contractual relation with state agency to

supply certain goods or provide services to the public (see Art.3207-3243 which provides

about contract of concession). In such case the concession (the contract between the

business Enterprise and state organ) may lay down the content of the contract that will

exist between the Business enterprise and the service seeker.

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E.g. Addis Ababa City Administration and Cleaner Private Limited Company agree as

follows;

Art. 1 Addis Ababa City Administration shall pay Birr 2,500,000 to the Company at the

beginning of each fiscal year.

Art.2 The Company shall give toilet service at a distance of 1km in every Asphalted road.

Art 3. The Company shall provide toilet papers to the service seekers.

Art.4 The Company may charge only ten cents for one time use of the toilet service.

This contract may be taken as a concession contract as it defines the obligation of the

company and the service seekers in advance. So, the offer of the service seeker is limited

only to declare his intention to be bound by the contract whose object was already

defined, by the government. In short the offer of the service seeker contains only his

intention to be bound and his request to the offeree to agree to be bound. So if such offer

is made the silence of the offeree will be taken as an acceptance.

In addition to those bound by law or concessions, a person may have a contractual

obligation to accept an offer made to him as per his contractual obligation. This is in line

with Art 1711 and Art. 1957. So in such case also silence is taken as acceptance. So such

offeree has an obligation to respond to the offeror if he does not want to be bound by the

offer.

N.B. The literal meaning of Art.1683 is that once offer is made, acceptance is automatic.

Sub Article 1 declares that when a party is bound by law or concession to accept “no

acceptance shall be required”. This is further strengthened by sub – art 2 which states that

“the contracts shall be complete upon the receipt the offer” thereby implying that the

offeror can claim performance of the contract once the offer is delivered to the offeree.

However; such interpretation seems to be illogical for the following reasons:

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Contract depends on agreement of contracting parties. There is no contract without

consent. The level of consent may be highly limited but should not totally be avoided. So

the offeree should at least be given the chance to study whether or not the offer has been

made as per his legal or contractual obligation. So the mere reception of the offer may not

complete the contract and the offeree should be given the chance to say “ok” or “No” for

the offer. So Art. 1683 (2) indicates date of conclusion of contract only so far as the offer

was not rejected.

The offeree may lack resource to accept the contract. For example, many customers

may apply to Ethiopian Telecommunication to get telephone line but the corporation may

not have resource to meet the demand..

The offeree may have legal or contractual or legal authority to stream line offerors. In

principle, Ethiopian Electric Power Corporation has to supply electric power service to

every person who demands the service. But when offerors are many, the Corporation may

give priority to investors.

The offeree can refuse to perform his contractual or legal obligation In such case the

offeree may be responsible for breaking its legal or contractual obligation for not

accepting the offer but it is difficult to conclude that it automatically accepts offer

declared to it.

Therefore Article 1683 should be understood as imposing an obligation to respond to an

offer. Such conclusion is in line with Art. 1682 and 1684 i.e. Art 1683 is an exception to

the right to remain silent. So Art.1683 should be amended as follows.

Art. 1683-2 Duty to Accept

Where an offeree has legal or contractual duty to accept an offer the offer shall be

deemed to have been accepted unless the offeree rejects the offer with in time specified

in the offer or where no time is specified within reasonable period.

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B .Preexisting Contractual Relation Silence may also amount to acceptance where

i) the content of the offer is to vary, supplement or complement

preexisting contractual relation (Art. 1684 (1). Variation of a contract

means changing, modifying or avoiding some of the provisions of the

contract. Variation of contract itself is a contract and hence needs

consent of parties. So, one of the parties may offer such variation. For

example, in a sale contract, the buyer may offer to change the delivery

date. Supplementary or subsidiary contract is a contract that may exist

independently but that help to facilitate the implementation of

preexisting contract. E.g. you bought a cloth and the seller offers you to

tailor the cloth; you bought goods and the seller offers you to provide

transport service; Photocopier proposes to bind the paper it has

photocopied; a contractor who builds the house proposes to construct a

fence for the same building. Completing a contract means some of the

issues not settled in the preexisting contract be agreed up on again. For

example parties in a sale contract agreed to be bound by the sale (Art

1695) but not determined place of delivery. Any party to such contract

may make an offer concerning place of delivery. If the offer is accepted

it complements or completes the preexisting contract. Complementary

contract is subordinate on the main preexisting contract.

ii) the offer is made in writing. In principle offer can be made orally, in

writing, by sign or conduct depending on the preference of the offeror.

But silence can be interpreted as acceptance only if the offeror uses

written form of communication that is addressed directly to the offeree

(Art 1684(2).

iii) the offer should be written on special document (Art 1684 (2). The

document that contains the offer should contain nothing else than the

offer. So offer written on the back of an invoice should not be deemed

to have been accepted by silence (Art.1685). Moreover, offer should be

written on a paper. E-mail is not a document.

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iv) The offer contains warning that silence amounts to acceptance. The

offeror should also expressly indicate in his offer that he considers the

silence of the offeree as acceptance after expiry of time limit indicated

in the offer Art. (1690(1) or reasonable period (Art.1691 (1) (Art 1684

(2)

So if the above four conditions are fulfilled both the offeree and offeror can claim that

silence amounts to acceptance

Exercise

Check the missing element, if any in the following examples

E.g.1 Prof Mackintosh was employed as a professor in Addis Ababa University for the

2006/2007 Academic Year. At the end this academic year Mackintosh wrote the

following letter to the University “Dear Sir, I want to continue to serve in your

esteemed institution for 2007/08 academic year”.

Eg.2 Biset agreed to construct a dwelling house for Belay and while constructing the

house Belay has e-mailed the following letter to Biset “Dear Biset, You know that I

my self have been providing construction material. But I am happy if you provide

the same for birr 300,000. Please give response or else I consider it as accepted.”

N.B The offeree‟s freedom of choice of means of communication may be limited either

by the offeror (Art.1681 (2) or by the law (Art.1689 (1).The offeror may choose any of

the four ways of communication and inform the offeree to use only such chosen means. If

the offeree uses another means than chosen by the offeror the acceptance is defective

since it does not exactly conform to the offer (Art.1694 (1). Public promise of reward is

accepted by conduct only.

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Effect of Acceptance

In general, it can be inferred from Art 1679 and 1693(2) that once an offer is accepted the

offeree is bound by his word. Once we know that acceptance is binding the question that

comes to our mind is “the moment at which acceptance begins to be binding.” In other

words “does acceptance begin to be binding at the time the offeree says “yes!” to the

offer or at the time such “Yes” answer is received by the offeror”. Such question becomes

relevant when acceptance is communicated in writing or by conduct since in such case

the time the offeree writes the acceptance or begins to perform the obligation stipulated in

the offer may differ from the time the offer knows such fact. For example, Alemu offered

to Abebe to buy his villa for birr 500,000 and Abebe wrote letter of acceptance on

January 26, 2008 but such letter reached Alemu on March 20, 2008.

Art 1692(1) of the code has answer for this. It provides that acceptance becomes effective

from the moment the offeree sends it to the offeror. Here it is not from the moment an

offeree writes a letter of acceptance but from the moment he put it in a post office or if it

is email, from the moment he clicks the “send” button of his email box. Therefore; the

consent element of contract is fulfilled at the moment the offeree accepts the offer

regardless of the knowledge of the offeror. This means an offer can be accepted even

after the death of the offeror unless the heirs withdraw such offer in accordance Art.

1693(1)

However; the acceptance must reach the offeror or his heirs before expiry of time limit

specified in the offer (Art. 1690) or reasonable per (Art.1691 (1). If the acceptance does

not reach the offeror cannot know whether or not contract is concluded between him and

offeree. If he has not received acceptance within Art. 1690(1), 1691(2) he can presume

that his offer was rejected. In short acceptance begins to produce effect from the moment

the offeree sends it to the offeror provided it reaches the offeror within time specified

under Art. 1690(1) or 1691(2)

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The offeree may abort the contract by withdrawing his acceptance (Art.1693 (2). He can

freely withdraw his acceptance before the offeror knows such acceptance through the

medium the offeree uses to communicate the acceptance to him i.e. if the offeror knows

the acceptance earlier than the offeree expects from a friend or other sources; the offeree

can still withdraw his acceptance regardless of the knowledge of the offeror. For

example, in response to an offer made to him by Bacha, Alemu wrote a letter of

acceptance to him and send it through post office. While sending the letter, Alemu got

Gifawosen, a friend of Bacha, and told him that he (Alemu) is sending letter of

acceptance to Bacha‟s offer… Gifawosen told to Bacha that Alemu accepted the offer.

Alemu can withdraw his acceptance until Bacha receives the letter unless it is proved that

Alemu requested Gifawosen to inform such acceptance.(see also Art. 1687(a) which

provides that declaration of intention is considered an offer only if the offeree knows it

from the sources the offeror uses to reach the offeree). For more detail discussion on this

point please see our discussion on effects of offer (Art 1693(1).

General Terms of Business No party can be assumed to be bound by general terms of

business which he did not agree to be bound with (Art 1685). General terms of business

are internal rules of a party that may have direct relevance to the obligation of the other

parties. Such general terms are frequent in employment contract and other big institution

which are monopoly suppliers if goods or service. The University Senate legislations are

best examples of these general terms of business. Denying legal effect to general terms of

business is one means of customer protection. However if these general terms of business

are proclamation, regulation or directives issued by competent authority they are treated

as law as far as they do not contradict with superior law (Art 1986).

To be bound by an obligation one has to know it and agree to be bound (Art 1679). So

any annexes to main contract never bind a party who has not known its content and not

agreed to be bound. Knowledge about the existence of the annex is not enough. For

example, an instructor might have known the existence of senate legislation which

provides more obligations than in the contract he signs. Such knowledge is not sufficient

to be bound by such senate legislation. He must be informed that such senate legislations

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are part of the contract before he signed such contract. Otherwise he can treat the senate

legislation as a morally binding instrument with no legal effect. Moreover, if the

instructor accepts such legislation without knowing its content, he should not be bound

since he did not participate in defining the object of such subordinate contract (Art 1679).

Negotiation vs. Consent (Art.1695) Negotiation is when one party proposes to the other

some of the contents of would be contract leaving the remaining to be completed or

proposed by the latter. The latter may also propose some and still leave others

undetermined and sends them back. Here both parties may use all possible moral and

legal techniques to persuade the other party to accept the proposal or to come up with

more favorable offer. So in short negotiation is a discussion made between parties

intending to shape the content of would be contract. Therefore any proposal made during

negotiation is not binding on the party making the proposal i.e. a party may withdraw

from the negotiation at any time (Art 1695 (1). However; if the negotiation is completed

(content of the contract is determined) and both parties agree to be bound by the

negotiation then it ends up becoming a contract (Art 1695 (1). In negotiation, it is very

difficult to know the party who made an offer. However; we may take as an offeror the

party who proposes the content of the contract last.

Parties need not reach agreement on all contents of the contract. They may expressly

agree to be bound by contents of the negotiation there by leaving detail to be completed

by the law (Art 1695 (2). For example, parties may negotiate sale of 500 quintals of

coffee and agree to deliver on Oct. 25 but fail to reach agreement on price but the coffee

is delivered. The delivery will be taken as implied consent and the price will be

determined by law (see Art. 2306).

2.2.3 Defect in Consent (Art 1696 – 1710)

If the consent expressed in the form of offer and acceptance does not indicate what the

offeree or the offeror really intended then there exists defect in consent. The cause of

defect in consent is either wrong information (mistake, false statement, fraud) or threat

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(duress, reverential fear, threat to exercise rights) or lesion. Defect in consent may be a

cause for invalidation of contract (Art 1696). However, the existence of defect in consent

does not necessarily lead to the invalidation of contract. Firstly defect in consent can

invalidate a contract only if a party who agreed to be bound because of information or

threat demands invalidation (Art 1808). Secondly in some cases the party whose consent

was defective may not be entitled to claim invalidation (1708, 1709, and 1710).

2.2.3.1 Defect of Consent due to Wrong Information

Mistake, fraud, and false statements may lead an offeror or offeree to have wrong

knowledge about the content of the contract i.e. a person is passing a decision to be

bound on the basis of wrong information. Let us see each of these causes of wrong

information in some details.

Mistake (Art 1996- 1703) is when a party makes misunderstanding on the content of the

contract or on the identity of the other contracting party. The person might have

committed such misunderstanding either because of his own poor inference from given

facts or false statement or deceitful practice of others person. Please see the following

examples

E.g.1. a buyer purchased a bracelet believing that it is 21 carat gold and latter on found

out that it is 14 carat gold. A seller says nothing to the buyer about the quality of the

bracelet.

E.g.2. Kebede informed Belay that a certain tablet can cure hair fungus and Belay bought

such tablet and discovered latter that Kebede was lying and the tablet is contraceptive

pills.

E.g.3. Zenitu locally produced edible oil from corn and packed it in the container of

internationally produced edible oil.

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One can invalidate or avoid his obligation on the basis of mistake if the following two

conditions are cumulatively fulfilled (Art 1997, 1998).

A/ mistake must be fundamental (Art 1998) – A mistake is fundamental when a person

misunderstands the object of the contract or the person with whom he has entered into the

contract. Art 1698 defines “fundamental mistake” in a very vague manner there by

inviting interpretation. The clue for such interpretation is the clause “elements of the

contract which the parties deem to be fundamental” found in the same article. The phrase

element of contract under Article 1678 indicates consent, capacity object and form of

contract but such meaning does not apply to Art 1698. paragraph 1 of title 12 (Art 1979 -

1695) also talks about elements of consent to indicate offer and acceptance so from the

above two we can understand that “elements” indicates requirements, parts or contents of

something. So elements of a contract should mean “content or object of a contract”.

It is nothing but the content/ objects of the contract that both parties to the contract

consider as important or relevant to their relation. In a contract the primary concern of the

parties is mainly to keep their obligation to the possible minimum and keep their benefit

to the possible maximum. So their primary attention is an object (rights & duties of

parties to the contract). Therefore, the element of the contract which the parties deem to

be fundamental is the object of the contract. This is also impliedly included in the

heading and contents of Art 1699 which takes about nature or object of contract. Mistake

relating to the identity of a contracting party is also fundamental mistake. In short a

mistake is fundamental when it related to the object or nature of a contract or identity of

the contracting parties. Nature of contract refers to types of contra